Thursday, April 29, 2010

New Faces on the FOMC

It appears that the President is about to nominate (if he has not done so already - I haven't looked at the most recent news) Janet Yellen as Vice Chair of the Board of Governors and Peter Diamond and Sarah Bloom Raskin as Governors of the Fed. As you probably know, the Governors are powerful people on the Federal Open Market Committee (FOMC). They always vote at FOMC meetings, in contrast to the 12 regional Fed Presidents, only 5 of whom vote at any given time (though the New York Fed President always votes).

Janet Yellen is currently the President of the San Francisco Fed, and I have talked about her views here. I had characterized her as a New Keynesian (in the sense of Mike Woodford), but someone corrected me on this - she is actually an Old Keynesian (think Walter Heller). Yellen is an economist with a PhD and some success as an academic, which I think is good. What is bad about Yellen are two things. First, she views inflation experience through the lens of the Phillips curve, and I think that is dangerous thinking. We know how this got us into trouble in the 1970s, and we risk repeating that experience if we think that way about monetary policy. Second, she seems inclined to think of one of the jobs of the Fed as being the reallocation of resources across sectors of the economy. Most recently, this view was reflected in the effort by the Fed to subsidize the housing market through heavy investment in mortgage-backed securities.

Peter Diamond seems an odd choice as a Fed Governor. He is a distinguished academic, and is often mentioned as a Nobel prize hopeful. However, his policy work is mainly on fiscal issues (e.g. Social Security), and has touched little on monetary policy or financial issues. The likely route by which he got appointed is that he knows Peter Orszag, the Director of the Office of Management and Budget in the Obama Administration. Orszag and Diamond coauthored this book.

Sarah Bloom Raskin seems more-or-less unobjectionable, and she's relatively young, as compared to the other 2, who would be ready for retirement in most lines of work. She has a BA in Economics, a law degree, and experience in financial regulation and at the New York Fed. It would be better if she had some serious credentials as an economic researcher, and a PhD in Economics, but sometimes smart people can pick up quickly what they need to know. She is married to a Maryland Democratic state senator, but it's not clear what her connection is to the Obama administration. Maybe she knows Geithner from the New York Fed?

I don't see much in these appointments to get excited about. Maybe these people can hold their own in an FOMC meeting with Bernanke, Kocherlakota, Lacker, Plosser, Rosengren, and Bullard. But maybe not.